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Bonn's Telecom Bombshell

February 12, 1995

International Business: Germany

BONN'S TELECOM BOMBSHELL

Wolfgang Butsch, Germany's Post & Telecommunications Minister, is known in Bonn's corridors of power as a master of political ambiguity, a careful bureaucrat with a gift for the innocuous-seeming sound bite. But his mild public pronouncements--to those shrewd enough to read them carefully--can also signal major policy shifts with big implications for German and European business and the pace of regulatory change on the Continent. It was such an announcement, on Jan. 31, that has Corporate Germany buzzing about the chances of a major speedup in the deregulation of the country's $66 billion telecommunications market.

Here's what happened. At hearings to consider the best way to update Germany's telecom laws, Butsch said he would consider permitting limited competition against state-owned phone monopoly Deutsche Telekom well before the 1998 European Union deadline for total deregulation. At the public level, at least, it was a simple move that didn't seem to threaten the status quo.

GREEN LIGHT. But according to industry executives, Butsch behind closed doors was going much further. By as early as this summer, Butsch may well be throwing open the door wider than many imagined in several segments of the German phone market. Butsch, say these insiders, will give the green light to powerful German companies that want to break Telekom's monopoly network. That would allow companies that offer private corporate networks and other services to bypass Telekom and slash their prices. Now, they must lease costly lines from Deutsche Telekom itself in order to get into the phone business. Butsch also assured industry leaders that they could soon start challenging Telekom with such high-tech services as multimedia and video-on-demand.

The implications of Butsch's actions could be far-reaching. German corporations will experience for the first time the benefits of low-cost, state-of-the-art service. "We'll push for it, and we'll use it," says Gerhard Rist, the executive in charge of telecom services for chemical giant BASF Group. At present, Deutsche Telekom rates can run as much as 300% higher than those in Britain, where the phone market has already been deregulated.

Big German companies are eager to take on Deutsche Telekom. Energy utility Viag, which now has 4,000 kilometers of fiber-optic network, hopes to wire the cities of Munich and Nurnberg. Veba, another energy company, is teaming up with Britain's Cable & Wireless PLC: It already has its own fiber-optic network, which it is seeking to offer to such third parties as corporate network operators at rates as much as two-thirds lower than existing Telekom prices. Veba board member Hermann Kramer says he already has one major customer who will lease capacity on Veba's network to the tune of more than $65 million a year.

Steelmaker Thyssen, for its part, has teamed up with BellSouth Corp. Herbert Brenke, chief executive of E-Plus Mobilfunk, a cellular-telephone operator, figures if he can cut out the use of Telekom lines to his switching stations, he should be able to reduce fees by at least 50%.

CHAIN REACTION. The emergence of greater competition in the corporate sector could start a chain reaction throughout Germany that accelerates the whole process of opening markets Europewide. "Once there's a crack in the wall, you can't control it anymore," says Candace Johnson, founder of a private telecommunications trade association in Bonn and vice-president of Iridium, the global satellite-services com- pany. France, Italy, and Spain could feel pressure to speed up their own planned deregulations.

There's no doubt, as Butsch told BUSINESS WEEK, that "the climate for liberalization has substantially improved." Still, deregulation remains political dynamite in Germany. Deregulation will force a radical restructuring at Deutsche Telekom, which already plans to eliminate 50,000 of its 230,000 workers by the year 2000 to become cost-efficient. Quicker deregulation may generate more job losses.

Given this volatile mix of politics and business, it comes as no surprise that in the past few months regulators and executives have been battling over the course of Germany's telecommunications policy. Outside pressure has also come from the U.S. Federal Communications Commission, which has threatened to block a $4.2 billion investment by Deutsche Telekom and France Telecom in Sprint Corp. unless deregulation in the telecoms' home markets is accelerated. "Germany is the key market in Europe in telecommunications," suggests FCC Chairman Reed E. Hundt. "They have got to go farther faster to get to the same conditions that characterize our communications market."

Butsch responded to all his pressures on Jan. 31 with his private signal that he would pry open the corporate market. To defend himself against the labor unions and the German left, which are opposing deregulation, Butsch can still claim he has preserved Deutsche Telekom's voice monopoly. But the market forces he has unleashed may yet overturn his well-laid plans.

BIG CHANGES IN GERMAN TELECOM

How deregulation will look

NEW VENTURES.

Partnerships between German companies and foreign telephone companies are gearing up to offer alternative telecom services to corporations, universities, and cities

NEW NETWORKS.

Instead of leasing costly lines from Deutsche Telekom, the new ventures will seek to operate their own lower-cost fiber-optic networks

MORE COMPETITION.

The joint ventures will increase the pressure for further market openings before the European Union deadline of 1998